Innovations in Government Accounting - The Case of Australia in a Westminster Context

Steller Dirk
Working Paper No. 3, Zentrum für Verwaltungsmanagement, Innsbruck 2003


Government accounting and other financial management practices have in recent times become one of the major target areas of public management reform. Public sector organisations traditionally use accounting systems based on cash inflows and cash outflows, commonly known as cash accounting. This cash style of accounting differs significantly from accounting systems used in the private sector, so called accrual accounting systems. The recent reforms to government accounting systems have focused largely on implementing accrual accounting in the public sector. The exponents of accrual accounting argue that it provides significantly more detailed and accurate financial information than cash systems.

One of the basic principles of accounting and financial reporting is that it should provide a true and fair view of the financial operations and financial position of an entity. Given that cash accounting records cash transactions only, no consideration is given to assets and liabilities or to items extending beyond the accounting period (i.e. prepayments and accrued expenses). Accrual accounting on the other hand produces detailed information on assets and liabilities and requires depreciation expenses to be matched to the expected life of the related asset. Similarly, accruing expenses such as employee entitlements are represented in the financial reports.

Countries with a Westminster style of government have tended to be the leaders in implementing accrual accounting in the public sector. This research paper provides a detailed description and analysis of the financial reforms undertaken in the Australian Commonwealth public sector.

Financial Management Reform – Cash to Accruals (Chapter 1)

The last twenty five years has seen the rise of New Public Management (NPM) theories. NPM seeks to improve the performance of public sector organisations by implementing private sector based management principles and practices. Financial management reform has taken a leading role in this reform process. One of the major changes has been the switch to accrual accounting. The expected benefits of accrual accounting in a public sector setting are said to be wide ranging and significant.

Reform in the Australian Public Service (Chapter 2)

The Australian Commonwealth Public Service (APS) is divided into organisations covered by the Public Service Act, also known as the core public sector, and other Commonwealth organisations of a more devolved nature such as public business enterprises. The core public service consists of approximately 123 000 employees and other Commonwealth organisations have a total of approximately 150 000 employees.

Since the 1980’s, the APS has undergone significant structural and operational reforms. Financial management reforms made up a substantial part of the reform package with the major impetus for financial reform coming from the National Commission of Audit report handed down in 1996. The report recommended wide sweeping reforms, particularly in relation to the implementation of accrual accounting.

Budget Process and Underlying Policies (Chapter 3)

The financial reforms in the Australian Commonwealth public sector included the development and implementation of an accrual outcome and output-based budgeting system.

Commonwealth agencies are required to define their desired outcomes, through outcome statements. Agencies also define the products or services through which the outcomes will be achieved, which are known as outputs and administered items. Prices are allocated to outputs and administered items and split between outcomes to allow government funding to be made on the basis of outcomes. Further, each outcome, output and administered item must have performance measures so an agency’s performance can be measured.

Financial Reporting Standards (Chapter 4)

In implementing accrual accounting, the Commonwealth government based its accounting principles on two separate sets of external reporting standards. (1) the Australian Accounting Standards, which are the same accounting standards applicable to private sector organisations in Australia, and (2) Government Finance Statistics, which are intended for macro-economic analysis and are based on standards developed by the International Monetary Fund. The Commonwealth government prepares financial statements according to both external reporting standards.

Financial Reporting Processes and Underlying Policies (Chapter 5)

Responsibility for accounting and reporting in the Australian Commonwealth government is largely devolved to agencies, with agencies being required to manage their own accounting software for the entry of all transactions and other accounting functions. The information prepared by agencies is then uploaded in aggregated form into a centrally managed accounting software system for whole of government purposes.

Financial Management Reform in the Australian Commonwealth – Problem areas and Future Challenges (Chapter 6)

Although many exponents of the switch to accrual accounting and budgeting expected far reaching benefits, not all of these have been realised. The direct application of private sector accounting principles in the public sector ignores the unique nature of government organisations. This direct application of private sector standards has in some cases caused government organisations significant problems especially in relation to assets. Further, the purchaser / provider type arrangements which came into being with the outcome and output budget format are also causing some difficulties for agencies. However, on balance the switch to accrual principles has increased the depth and detail of financial information produced by the Commonwealth government.


icon_pdfWorking Paper - Gov. Acc. (Complete) (10650090900.pdf)
GFS Budget Statement (10644163970.pdf)
icon_pdfAAS31 Budget Statements (10644165300.pdf)
AAS31 (10644166000.pdf)
icon_pdfAAS29 (10644166360.pdf)
FMA Act 1997 (10644167080.pdf)
icon_pdfPublic Service Act 1999 (10644167500.pdf)
Budget Stats 2002-03 (10644168390.pdf)
icon_pdfCharter of Budget Hoensty (10644168880.pdf)
Cth.Authorities & Co Act (10644169650.pdf)
icon_pdfDept Ag & Fish ann rep (10644170290.pdf)

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